Retrospective tax laws trip up Vodafone again

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If the R10,000-crore tax on its $11.2-billion purchase of Hutch’s India operations wasn’t bad enough, Vodafone has got caught in another retrospective tax case. The company’s R3,434 crore transfer pricing addition case involving its subsidiary, Vodafone India Services Pvt Ltd (VISPL), is also based on a retrospective amendment, this time the one made to the FY12 Finance Act.

Another company to get caught up in the same Act is Shell India Markets and its adjustments to the income works out to R3,137 crore. Both cases pertain to FY10, and both orders were passed on January 29 this year.

The Vodafone case involves its issue of 5.6 lakh shares to Vodafone Tele-Services India Holding Limited, Mauritius in two tranches — one on July 16, 2009, at R7,110 and another on January 24, 2010, at R6,447 each. VISPL has argued these are capital transactions and do not attract Section 92(1) of the Income Tax Act — it is only if the transactions come under Section 92(1) that the next question: of arm’s length pricing — come into effect.

This is where the amendment to the Finance Act of 2012 comes in. As the amendment says, “the current definition of International Transaction leaves scope for its misinterpretation... it is therefore, proposed, to amend Section 92B of the Act... to clarify that the international transaction shall include a transaction of business restructuring … irrespective of the fact that it has bearing on the profits, income, losses or assets… This amendment shall take place retrospectively from April 1, 2002.”

With this retrospective amendment in place, the taxman has determined that instead of getting R392 crore, VISPL should have earned R2,999 crore more since each share was actually worth R60,445.

Add in the interest costs, and the transfer pricing order states that a total of Rs 3,434 crore needs to be added to VISPL’s income for FY10.

In Shell India’s case, there are two types of adjustments, one for the work done by the company in India and one for share transactions of the type Vodafone did. Shell India sold 4.78 crore shares to Shell Gas BV on December 24, 2009 at par value of R10 per share. Given the profits of the company, the valuation report put the share’s value at R2.79 each and Shell India sold them at R10 each. The taxman rejected this saying it did not capture the brand value of Shell or the future business projections – it has a licence for 2,000 petrol pumps and is making big investments on the promise of possible deregulation of the sector, making it the only MNC in India with a license to run gas stations.

Like Vodafone, Shell India too argued the taxman has no jurisdiction as issuing of shares does not add to Shell’s income and is therefore not an international transaction. Shell India has also argued that there is absolutely no difference in its shareholding pattern after the share issue and that the shares were issued primarily to infuse capital.

Once again, the Finance Act of 2012 comes to the rescue and the transfer pricing order makes the same point as in the case of Vodafone. And in the case of Shell, R851 crore have been added to its income by raising the value per share to R187.96 on the basis of this transaction. All told, R3,137 crore has been added as transfer pricing adjustment for FY10, which includes R1,903 crore interest on the short receipt of R15,200 crore associated with FY09 share transaction.

Subsequent circulars won’t create TDS obligation if circular applicable at time of payment exempted it

Where circular effective at relevant time exonerates an assessee from TDS obligation on payment to non-resident, subsequent circular would not create such an obligation retrospectively

In the instant case the assessee had paid commission to foreign agents on which it did not deduct tax in view of Circular Nos. 23 of 1969, 163 of 1975 and 786 of 2000. The revenue made disallowance of expenditure under section 40(a)(i) holding that it was mandatory for assessee to deduct tax as Circular No. 7 of 2009 had superseded earlier circulars.

The High Court held in favour of assessee as under:

1) The assessee’s assessment would be governed by Circular, which was operative at the relevant time (i.e., assessment year 2007-08) and which did not oblige the assessee to deduct tax at source;

2) The assessee was not entitled to deduct TDS. The department could not have taken different stand in subsequent years or assessment year 2007-08, when the circulars were operative and were not withdrawn;

3) Circular No. 7 of 2009, dated 22-10-2009 withdrawing earlier circulars became operative only from 22-10-2009;

4) The circulars in the relevant year were binding upon the department and assessee could challenge the affect of the Circular but that the Assessing Officer did not have any right to ignore the circulars and to disallow non-deduction of tax at source under sections 195 and 40(a)(i);

5) Thus, as assessment was governed by that circular which was operative at relevant time assessee was under no obligation to deduct tax at source – CIT v. Model Exims Kanpur (2013) 38 taxmann.com 319 (Allahabad)